Quality of Promoters and Impact on Share price in Investing

Quality of Promoters and Impact on Share Price in Investing 

Introduction

A promoter is an individual or an entity who does the preliminary work incidental to the formation of a company, including its promotion, incorporation and flotation and solicits people to invest money in the company, which is being formed. The entire lot of people and other companies that control a company in this way is called its promoter group. Their combined shareholding is called promoter holding. Higher the promoter holding in a company,greater is the promoters control over it. Promoters exercise their control by taking key decisions of the company and appointing people in various positions of its management and board. They also provide the visions for the existence of the company. It is, therefore necessary that the promoters continue to hold a dominant shareholding position in the company. A large promoter group also provides stability to a company. Generally, promoters are in a fiduciary relationship with the company and its investors and shareholders, and must avoid conflicts of interests and exercise reasonable care in performing their duties. They must refrain from self-dealing or other types of abuse to take advantage of their position as a promoter. 

When money is invested in shares of a company, Quality of Promoters is the most important aspect. It is because promoters are the people who are going to be involved with the day to day activities of business and is at the foundation of success of entire business. If promoters carry out their duty with integrity and efficiency then every stakeholder of the business including shareholders can flourish and wealth maximization takes place.

In India a lot of companies which had corporate-governance issues have been the biggest wealth destroyer from shareholders perspective. In many cases it was not possible to identify the symptoms until it was very late for shareholders to exit. However, if few aspects are kept in mind while analyzing a company, shareholders can save their capital.All the mechanisms put in place by a company to protect stakeholder rights, in particular shareholders rights, is referred to as its corporate governance structure. It consists of policies, procedures and regulations that define how the management must deal with its stakeholders, and the remedies available to them in case of a violation. 

Important Points in Respect of Quality of Promoters from Investment Perspective :

• Educational qualification, age, experience in the sector or elsewhere, role assigned etc. are the important points to be checked to determine quality of promoters while investing in a company

• Shareholding of promoters group greater than 51% in the business shows the interest of promoters as well as it helps in proper implementation of business decisions due to majority ownership. Knowingly and willingly promoters are unlikely to take decisions which are not in the interest of the company in which majority of their personal wealth is invested

• Regularity of reporting to regulatory authorities and stock exchanges is very important. Failure in timely reporting of financial statements and necessary disclosures as required by stock exchanges can be considered as a red-flag on the part of promoters. Eg. If a company does not report it's quarterly results within time limit set by regulations it is a red-flag

• Avoid companies where promoters have pledged substantial part of their stake to raise funds. In case promoter makes a default, then banks/financial institution which has given loan will sell the pledged shares in open-market to recover it's loan which can lead to meltdown in share prices

• Integrity on the part of promoters is very important. Promoters remuneration for the time and energy they contribute to the business must be analysed thoroughly by investor to determine whether it is reasonable or not.

• Personal transactions of promoters or relative of promoter or any related entity  with the company shall be on fair terms. Investor has to ensure that related party transactions are not of such nature which exploit resources of company for personal gains

• Concept of "Independent director" was introduced by SEBI some 17-18 years back to ensure that board of directors also have people who are outsider (unbiased) and take decisions in the interest of stakeholders at large. Listed companies are compulsorily required to have one-third composition of board to comprise of Independent directors as per regulations. Investors have to ensure that independent directors are appointed and removed as per the policy and also check whether they are really independent or related to promoters

• Necessary information related to promoters remuneration, related party transactions and independent directors etc is available in the annual report of the company which is available on the website of the company as well as on the stock exchange website

• Violation of rules of stock exchanges, companies act, taxation act etc can be considered as a red-flag from investor perspective. Violation of internal policies,guidelines and procedures established by the company is also a red-flag from investor perspective